Silver's Summer Rally To Gain 'Legs' From Fed's QE3 Initiative

Silver used for industrial production is expected to rise to a record 511 million ounces by 2014 following a two consecutive years of decline. More than half of all silver is used in industrial applications, from automobiles to polyester.
Reuters

The two-month rally in the price of silver gained momentum Thursday from the Federal Reserve's decision to resume large-scale bond buying, a move that will also continue the surge in silver mining company shares, analysts said.

Since June 28, silver prices in New York trading have gained 26 percent, more than twice gold's increase of 11.6 percent, according to data from the CME Group. Silver-related securities also have jumped: iShares Silver Trust ETF (NYSEARCA:SLV) has gained 23.96 percent to $33.38, outpacing the SPDR Gold Trust ETF (NYSEARCA: GLD)'s 9.53 percent gain to $170.90.

The Fed said Thursday at the conclusion of a two-day meeting of its interest rate-setting panel that it will begin buying more than $80 billion in securities per month to boost the anemic U.S. economic recovery. The announcement of what is commonly called QE3 sent the broader stock market soaring and also boosted the price of precious metals -- particularly silver -- which jumped nearly 4 percent. Gold gained about 2 percent.

UBS analyst Edel Tully wrote last week that the Fed move will benefit gold and silver, though silver will benefit the most.

We also lift our one- and three-month silver forecasts to $37 from $32 and $35 previously, she wrote last week. We expect that silver will outperform gold, and, in turn, the gold/silver ratio will trend lower over this period.

Also, veteran commodities trader Jim Rogers said in August that he favored silver over gold, citing its discounted price.

Nowhere has the summer's silver rally been more evident than in the share price of Silver Wheaton Corp. (USA), which signs contracts with silver miners for a share of the production.

Shares of Vancouver-based Silver Wheaton -- which over the last three years has had revenue growth of 76 percent, profit growth of 340 percent and total return of 49 percent -- shot up $2.05, or 5.7 percent, to $38.27 on Thursday. Year-to-date the stock is up 31.77 percent.

Company officials expect more of an upside, in part because of the Fed's decision to expand its balance sheet.

We see silver prices continuing to climb, said Randy Smallwood, president and CEO of Silver Wheaton. We are very bullish.

Silver Wheaton bought 25 million ounces of silver in 2011 and expects to increase activity to 28 million this year and 48 million ounces by 2016, said Smallwood. Around 85 percent of its holdings are silver, and the rest are gold.

The company has partnerships with miners like Barrick Gold Corp. (NYSE: ABX), the world's largest gold producer, Goldcorp Inc. (NYSE: GG), Glencore International Plc. (London: GLEN) and HudBay Minerals Inc. (Toronto: HBM). The miners sell to Silver Wheaton for an upfront fee, which is used to finance the miners' expansion efforts. Silver Wheaton has 21 different mines under contract, mostly in the Americas.

Around 70 percent of all silver is produced as a byproduct from gold and copper mining, so the amount of inventory tends to remain constant each year. The metal is also used in manufacturing in the technology sector, which creates additional demand.